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Convertible Bond Arbitrageurs as Suppliers of Capital

Author

Listed:
  • Darwin Choi
  • Mila Getmansky
  • Brian Henderson
  • Heather Tookes

Abstract

This article examines the potential impact of capital supply on security issuance. We focus on the role of convertible bond arbitrageurs as suppliers of capital to convertible bond issuers. We estimate a simultaneous equations model of demand and supply of convertible bond capital, linking the time series of aggregate convertible bond issuance to measures of capital supply: convertible bond arbitrage hedge fund flows, returns, and a proxy for arbitrageurs' use of leverage. We find that issuance is positively and significantly related to increases in all three supply measures. To provide further interpretation, we use the September/October 2008 short-selling ban as a natural experiment to examine the impact of an exogenous shock to the supply of capital from arbitrageurs. Results from both empirical approaches provide evidence that the supply of capital from convertible bond arbitrageurs impacts issuance. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Darwin Choi & Mila Getmansky & Brian Henderson & Heather Tookes, 2010. "Convertible Bond Arbitrageurs as Suppliers of Capital," The Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2492-2522, June.
    • Handle: RePEc:oup:rfinst:v:23:y:2010:i:6:p:2492-2522
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    File URL: http://hdl.handle.net/10.1093/rfs/hhq003
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